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Macroeconomic and Monetary Developments First Quarter Review 2012-13: -30th July 2012

External Sector

CAD risks and concerns about sustainability persist

Softening of global crude oil prices and moderation of gold imports may slightly lower current account deficit (CAD) in 2012-13, but risks remain, especially with slowing global growth and trade and low price elasticity of import demand.

Services exports (net) at US$14 billion in Q1 of 2012-13, have declined by about 12 per cent year-on-year. Current indications are that software export earnings may even be lower than projected by NASSCOM.

High external debt, deterioration in the net international investment position and a moderate decline in forex reserves have weakened the resilience to external shocks.

CAD-to-GDP ratio touched an all-time high of 4.2 per cent of GDP in 2011-12. With slower growth, sustainable level of CAD has also come down to around 2.5 per cent of GDP.

Monetary and Liquidity Conditions

Monetary and liquidity conditions have eased and are not significantly impinging on growth

A 50 bps repo rate cut, following a 125 bps CRR reduction, coupled with active open market operation purchases have significantly eased monetary and liquidity conditions during 2012-13 so far.

While the rate of deposit expansion is slow, credit growth has picked up in the current financial year in line with the indicative projection. The flow of resources from non-bank sources has also been good.

Though there has been some rise in nominal and real interest rates during 2011-12, computed real weighted average lending rates (WALR) are currently significantly lower than the pre-crisis period of 2003-04 to 2007-08 when the investment boom took place.

Financial Markets

Currency and equity markets face pressure; stress may stay with rise in leverage

Spillovers from global financial market uncertainties and waning investor confidence amidst deteriorating macroeconomic conditions, have kept domestic currency and equity markets under pressure.

The Reserve Bank’s House Price Index (HPI) show that housing prices increased further during Q4 of 2011-12 in most cities, though transaction volumes fell in many cities.

Going forward, financial stress is likely to remain with falling earnings and high leverage for non-financial firms and global uncertainties.

Price Situation

Inflation pressures persist despite weakening growth momentum

Inflationary pressures have persisted, with significant contribution from food and energy segments. Inflation expectations also remain sticky.

Going forward, the decline in global commodity prices will provide some relief, but the gains have been partly offset by rupee depreciation.

Risks to inflation remain from unsatisfactory monsoon and increases in MSP even as growth slowdown eases demand pressures. While core inflationary pressures are currently muted, a continued rise in real wages may spill over to core inflation.

Persistence of inflation, even as growth is slowing, has emerged as a major challenge for monetary policy.


1st Quarter Review of Monetary Policy Statement 2012-13....Click Here

Mid-Quarter Monetary Policy Review: March 2012 ...Click Here

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